Taking a Look at Measuring Advisors’ Performance

It might be helpful to clients and prospects, but is there a goodand legalway to measure and report on advisors' performance?

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I was researching another story the other day, and came across a nice piece that Jack Waymire penned for RIA Biz back on July 3, 2012 called “6 Reasons Why RIAS can’t—or don’t want to—have track records.” Jack is also a columnist for Worth magazine, at which, back in 1994, I created Worth’s list of America’s Best Financial Advisors (I believe the current word for this is “synchronicity”), and have had more than a passing interest in measuring advisor performance since. Consequently, I read Jack’s story with great interest.

He focused on the drawbacks to having a track record, such as: the cost of audits; differences in client goals; determining what counts as AUM; regulatory issues, and the brokerage industry’s reluctance to having half of its “advisors” performing in the bottom 50%, or having a substantial portion of their salesforce lag behind “market” performance. Yet Waymire also noted the substantial motivation for advisors having such a performance metric: “Our studies show that a [major] source of [investor] confusion concerns advisors’ track records: Namely, why some financial professionals have records and others do not.”

At Worth, back in the day, we essentially punted on the performance issue, relying instead on nominations from reputable and/or leading financial advisors, and then screening for education, experience, specialization, compensation and conflicts. We also looked at sample financial plans, ADVs and credit reports. (While the vast majority of them were “independent” advisors, using independence as a screen hadn’t occurred to me back then.) It may not have been a very comprehensive list, but I’m happy to say that very few of our selections have come back to haunt me.

Still, like many investors, over the years, I’ve found the idea of a single, completely objective performance metric for financial advisors as compelling as it would be useful. Yet, the more I’ve considered the prospect, the more problematic it seemed. Due to the differences in goals between clients, focusing on investment performance would be both unfair and misleading: For a wealthy client with no heirs, long-term Treasuries might be all the risk they need to take—why should their advisor take a performance hit for doing the right thing by them?

Consequently, to my mind, the true measure of advisor performance would be to gauge how effectively one’s clients reached their goals. But even this would be problematic. To begin with, when you think about it, that’s a pretty subjective analysis. Then there’s the measurement itself: should it be all or nothing (showing that each client either reached or failed to reach their “goals”)? Or would you measure the percentage of each goal attained, and then somehow aggregate the answers? Finally, there’s the problem of time frame: at what point would you consider a client to “have attained their goals”? Not to mention that due to the ambiguities and the potential for inflated “performance,” I highly doubt that the SEC would allow it to be disclosed to clients and prospective clients anyway.

Yet despite their validity, these—and undoubtedly many other perfectly good reasons that a advisor performance metric wouldn’t work—are way too “inside baseball” for most clients to get their brains around. At the end of the day, the most important question is: What should advisors tell their clients and prospective clients about their lack of a track record? Seems like, after all these years, the best answer is still the simplest one: “All clients—and client goals—are different.”

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